Month: July 2017

Hello all! Just got back from Addvalue Tech’s AGM which was held on 28/7/2017 at their office in Tai Seng. Today I will be sharing some of the things I learnt from their AGM.

General Atmosphere

The meeting was held in their board room. From the looks of it only about 10-15 shareholders turn up for the meeting. Chairman, COO and 1 independent director were present with the other 2 directors being unable to attend as they were overseas. Only about 4-5 shareholders including myself asked the management questions on their business. Management was quite detailed in explaining their rationale for certain decisions.

1) On the supposed disposal of AVC

AT have announced several times on the supposed disposal of AVC to a China buyer. It has been going on since 2014 with no clear conclusion on the deal. With regards to that, the Chairman’s reply was that the ball is in the court of the buyer. They have fulfilled their end of the deal and are now waiting for the buyer to fulfill their end of the deal.

The Chairman also shared that they are not pressured by the time taken to dispose AVC. They are taking a passive approach in this, and they are in no hurry to close the deal with the buyer. They rather work on building up AT’s brand and image which will eventually pay off if other buyers become interested in buying AVC. As for now, the deal is still fluid.

2) Amortization of AVC

If you were to look closely at their Annual Report, they did mention that most of their losses were contributed due to the amortization of AVC, the subsidiary to be sold. According to the management, FY 2017 results consisted of a 3.5 million dollar loss of which 2.4 million dollars were attributed to the amortization of AVC.

One shareholder asked when the amortization will eventually stop as the amortization has been ongoing for 2 years. The management reply was that there are still a 3.5 million dollar left to be amortized which in my opinion should accounted for in the next FY. The shareholder also asked why does the management not amortized it at one shot rather than do it over a few years. With regards to that, the management reply was that this is basically a number issue and is like a ‘paper loss’.

I eventually asked whether AVC is still functioning as per usual. Their response to that is that most business in AVC are transferred to their main subsidiary and hence AVC is dormant and pending the disposal deal.

3) On the IDRS business

The management are very upbeat about the prospects of the IDRS business. They shared that when they started out building the IDRS several years back they did not expect it to be such a huge thing.

— Potential competitors —

One shareholder asked about the EDRS (supposedly the European Data Relay Satellite) one that can carry out almost the same function as the IDRS. The management response to that is that the EDRS uses the laser function to transmit data which is much more expensive and needs to be very precise. Also, the EDRS is very bulky and big in nature. The EDRS can also transmit more data as it as a wider bandwidth.

Whereas, the IDRS competitive advantage is that it is small and compact which is more suitable for use by LEO satellites as satellite makers are constantly downsizing their satellite. The management also said that IDRS data bandwidth is sufficient as they understood from various LEO satellite makers that they do not require such a high data bandwidth.

Also on the IDRS, they said that it is ready to be commercialise whereby the EDRS is still not ready.

— IP protection —

Management says that the IDRS invention are all copyrighted. One shareholder then ask if it should be patented. With regards to that, the Chairman said that by taking on patent, they would need to disclose their methods in the application and what they do that are so different that requires to be patented. The Chairman says that this will divulge their trade secrets in coming out with the IDRS. On this matter, the Chairman prefers to use copyrights so that none of these techniques are disclosed.

Management also said that they take a serious view in backing up their data weekly and employees have an official log book to write down which part of the invention they are working on so that they have a safeguard if any of these were to leak out.

4) On new business model

Ever since 2015, Addvalue have redefine their business model by coming out with 2 focus, the “Emerging Market” and the “Commercial”. This is because the downturn of the shipping industry and the O&G sector have hit them hard.

With regards to the Emerging Market focus, management have been taking active steps in penetrating emerging markets as shown from the recent announcement on their entry into the Thailand market. They are seeing potential in these markets as their fishing vessels are old and government are stepping up to prevent overfishing by mandating that their vessels be upgraded with tracking abilities. The management’s plan in China is to latch on bigger players to promote their products there.

On the Commercial focus, the management have pursue a change in direction from one whereby they are only focused on selling their hardware to one that provide whole solutions. The management are embracing that by packaging certain services like weather tracking app, emergency hotline app etc together during the sale. This will help them to earn recurring income from subscriptions.

On the airtime revenue agreement with Inmarsat, the Chairman hinted that it is coming “soon”. After I further questioned the COO after the AGM, he said that the airtime revenue agreement will not be a 50-50 as “Inmarsat have a higher upfront costs and investment due to their satellite” etc but it will be “quite a good margin”.

5) On possible spin off of subsidiary

Management guided that they have applied for approval from SGX, but will not be in a hurry to spin it off. They would want to see the IDRS gain some traction first and if spinning it off can attract better investors to further propel the business they would do it.

6) On management

Through the entire AGM, the management have said that they are very prudent in their expenses and the Chairman said that the directors have taken pay cuts over the past few years. (To that we can’t really tell since the exact figures are not disclosed in the AR) Chairman also highlighted the hardship and suffering that they went through these years to get the IDRS business going but eventually persevered to see it through till today.

He also mentioned that they are aware and do not want to dilute shareholder’s value hence they did not always go for a placement to raise cash but rather borrow money at a higher rates to fund their operations. However, when they stumbled upon the huge potential of the IDRS, that’s when they decided they have to do a rights issue and eventually raise more money to expand this. He said that for such a small company like them to take on such a huge undertaking of building the world first IDRS is indeed a no easy feat.

In conclusion,

this is most of the main points that I manage to capture from the AGM. Hopefully, its useful information for you! 🙂

In today’s blog post, I would like to talk more about debt. Many a times, debts are always cast with a negative light as we are used to the narratives told to us like how one can go bankrupt due to mounting debt. There are definitely some truth to that but debts can be good as well. Generally if debts are used to purchase income generating assets that can yield more than the interest rate of the debt then it is good debt. On the other hand, many people tend to get into debt spiral because their purchase are often liabilities than an asset. For instance, swiping your credit card for a new bag or a new gadget etc.

The general rule of thumb is that:

Total assets’ yield > Interest rate of debt

for it to be a good debt.

Likewise for a company, the understanding of debt is the same. For whatever reason that the company decides to take on debt, the things that the debt is use for should generate a yield that is more than the interest rate of the debt. I will show you 3 ways to tell if the company’s debt is good or bad in a company.

1) Look at the revenue and profit

For a company to take up debt, it’s foremost objective is to grow the business. If taking on the debt does not lead to higher revenue and profit growth, then there is reason to believe that the debt the company take on is not really good.

2) Is there cash flow into the business?

Another important way to tell if the company’s debt is good or not is based on whether the business can generate cash flow to pay off the debt. If the business can bring in monthly cash that are more than the debt payment then the debt is good. Likewise if the company is consistently registering negative cash flow it is likely that the company may take on more debt to pay off current debt which is not good.

3) Is there cash to pay off interests?

Having back up cash is important for emergency uses. In order for the company to be able to operate smoothly it should be able to pay off its interests with some of the back up cash it have. This ensures that the company don’t run into a situation whereby they are unable to meet debt obligation because there are some bad months in the business.

Case Study

We shall take a look at two different company and their use of debt to try to understand good and bad debts.

Company A:

Total Debt for Company A = USD $ 4,042,853,000

Company B:

Company B total debt = USD $ 68,678,591

— Revenue and Profit —

Company A:

Declining revenue and loss making company.

Company B:

High revenue growth and profit making.

— Cash Flow —

Company A:

Cash not coming into the company from their existing business.

Company B:

Cash into company from existing business is positive.

— Sufficiency of cash to meet debt obligations —

Company A:

Interest expense is about USD $ 200 million every year, but Company A have only USD$ 300 million left in 2016. Will they be able to tide through another year?

Company B:

Company B’s yearly payment is about US$ 6 million which is easily covered by the amount of cash and cash equivalents they have.

In conclusion,

hopefully the above case study is able to show you in real life the difference between good and bad debt in a company. For those who are curious, Company A is Noble Group and Company B is Geo Energy Resources. All the 3 ways describe above should be look in totality with a company’s business model to understand if the debt are sustainable. For instance, in a cyclical industry, company’s earnings can be very high in a bullish up cycle, this can mask out some of the red flags of their debts. Hence it’s good to use these 3 ways and compare it across a few years to understand if they have been able to manage their debts well.

Sapphire Corporation Limited is one of the few companies listed in the SGX that have railway business in China hence exposing it to the potential opportunities in the One Belt One Road initiative (OBOR).

It’s 100% owned subsidiary Ranken is the company that are in the railway infrastructure business in China.

Sapphire is a turnaround story after the new management turned it from a mining company into a railway infrastructure company.

There have been some good analysis on Sapphire online (you can read one of them here ) hence I shall not delve deeper into them. But today I want to focus more on the future for Sapphire and postulating what could be in store for Sapphire.

What actually caught my eyes was this:

This was announced in May 2017, where Ranken have entered into a strategic partnership with BeiJing Enterprises Water Group and China Railway Investment Group. After doing some research, there are some reasons to believe that this partnership may morph into projects in China Sponge Cities programme.

1) What is the China Sponge Cities programme?

As China becomes more urbanised, the problem of flooding has become a major issue in China. Also, China is also one of few countries with the least water per capita. Water conservation and management have become a pressing issue.

The Sponge Cities programme was rolled out in 2015 where a few cities in China were pilot tested for the programme, which will eventually be rolled out to all cities. For instance, China hopes to have 80% of the cities constructed to be of Sponge Cities standard by 2030.

In the 13th Five Year Plan, the Chinese Government also set out some important objectives for water conservation.

These all show the urgency and importance that the Chinese government places on water conservation and management hence the importance of the Sponge Cities programme.

So how will this development benefit Sapphire?

2) Potential benefits for Sapphire

To understand the potential benefits to Sapphire, we first need to take a look at what the management of Sapphire are looking to do in 2017.

Yup the management is trying to partner up with bigger companies in China to secure projects together under the Public-Private Partnership (PPP). That was found in the 1Q17 report released on 12 May 2017.

And in 16 May 2017, they announced the strategic partnership with Beijing Enterprise Water Group (BEWG) and China Railway Investment Group (CRIG).

PPP policy in China have been quite problematic. Due to the fact that many state owned enterprises are better positioned to win the PPP contracts as they are better financed by China banks compared to private firms.

Hence Sapphire partnership with SOE will definitely positioned it well to grab a piece of the pie although in PPP profits margin are usually much lesser compared to going at it alone.

Furthermore, this partnership pushes Ranken out of their usual railway infrastructure business by allowing them to build expertise in new areas of infrastructure.

In my opinion, this partnership could be a signal for them to take on projects under the Sponge City programme. Just like how in May 23, 2017 , an Australian Consortium announced their participation in China Sponge City programme.

They could be doing the same with the partnership between the three. BEWG have expertise in building water treatment plants and systems, and Ranken have expertise in tunneling which could be of help to creating a good drainage system for the Sponge Cities. Quite frankly, I can’t find much information on CRIG as their website is really hard to interpret haha!

Taking a deeper look into BEWG, which has a much better investor relations website. In an announcement dated 27 June 2017

Hmmm could Ranken be part of any of these 10 projects? Out of 10 projects, 7 projects are PPP of nature! And some projects requires works like ecological restoration which Ranken have some form of experience with.

This will be an exciting development to watch!

In conclusion,

Sapphire lack of contracts wins have led to many investors pushing down the stock price. But upon digging further it seems that there might be a silver lining. However, all these are just possible developments in my opinion which could be beneficial to the company. Please always dyodd! 🙂

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